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Use HSAs to enhance retirement security
Ryan Tiernan
Senior National Accounts Manager
  • Position health savings accounts (HSAs) as a complement to a defined contribution (DC) plan.
  • Educate employees on HSAs.
  • Review HSA investment options for appropriateness and range of objectives (similar to a DC plan investment structure).

Health care costs threaten retirement readiness

Rising medical expenses can impede retirement savings. Not only do high costs affect plan participants’ ability to make contributions during working years, they can also consume assets post-retirement. Consider these statistics:

  • 290%: Increase in U.S. health care spending from $2,900 per person in 1980 to $11,200 per person in 2018 (figures in 2018 dollars), according to The Brookings Institution
  • $265K: Projected savings many 65-year-old couples will need to cover health expenses in retirement, according to the Employee Benefit Research Institute
  • 2x: The rate by which, on average, increases in health spending have outpaced increases in wages over the last decade, according to Peterson-KFF Health System Tracker

To help contain these costs, many companies have moved to consumer-driven health plans (CDHPs), which carry lower premiums but higher employee deductibles. Such plans are often paired with a tax-advantaged health savings account (HSA) to cover out-of-pocket expenses.

The role of health savings accounts

Although HSAs were originally introduced as a cost-saving measure, many employers are realizing that these accounts can work effectively with a defined contribution (DC) plan to promote better retirement outcomes.

HSAs offer several advantages:

  • Triple-tax free status: Employees enrolled in CDHPs can contribute to HSAs with pretax money. Principal and earnings are not taxable. Unlike DC plans, distributions are not taxed if used for qualified medical expenses. While there are annual contribution limits, there is no cap on how much can be invested and retained in the account.
  • “Stow it and grow it”: HSA assets can be withdrawn at any time without penalty (for qualified health care expenses), and unused balances can accumulate. Employers often contribute to an employee’s HSA. Money can be used on a wide range of health spending.
  • Long-term investing: HSA assets can be invested to help build savings for health care expenses. For short-term investments, a guideline is to set aside one year of maximum health care insurance deductibles. Amounts beyond that can be invested for growth for overall financial wellness and to cover medical expenses in retirement.

HSA assets are growing

As of August 2019, there were 26 million HSAs holding $61.7 billion in assets, a year-over-year increase of 12% for accounts and 20% for assets. Over one million of those accounts are investing a portion of their assets. 

Total HSA assets (in billions)

Bar chart showing the gradual rise of HSA assets and increasing proportion of investments over 14 years. In 2006, total assets, including both deposits and investments, were $1.7 billion. Only $0.1 billion were investments. In 2018, total assets were $53.8 billion with $10.2 billion in investments. This source, a Devenir Research survey from August 2019, projected that 2019 would have $64.2 billion in total assets and $13.8 billion in investments.


Employee education is key to success

For many retirement savers, the full range of HSA benefits may not be immediately obvious. That’s why education is so important. In order to achieve better outcomes with HSAs, participants need to first understand what’s possible.

When planning an HSA education program:

  • Clearly distinguish HSAs from other health savings vehicles, such as “use it or lose it” flexible spending accounts.
  • Highlight the costs of medical care in retirement and how HSAs can be used to address them.
  • Explain differences in tax treatment between HSAs and DC plans.
  • Outline ways to distribute contributions among HSAs, DC plans and other benefits. For example, employees might first put enough in their retirement plans to maximize their employer’s match, then put enough in an HSA to meet one year’s deductible and then invest part of the HSA.

Investing for future health care costs

As HSAs grow, plan sponsors are approaching investment options similarly to DC plan investments. Like retirement savers, HSA enrollees have varying risk tolerances and financial situations when investing for future health care costs. An HSA investment menu, then, can address a range of objectives and life stages much like a DC plan menu.

Ideas from DC menu planning that plan sponsors can apply to HSA menu arrangements:

  • Target date: The target date series used in DC plans may be an effective way of investing for long-term health care costs in a single investment solution. 
  • 401(k) mirroring: Offering a core investment menu similar to the DC plan organizes the benefits package for employees and simplifies the due diligence process for employers.
  • A mix of investment options: Risk and financial situation are highly individualized, so the menu should contain a range of choices, including some that focus on stable investments.

An age-based framework to consider

As participants progress through career stages, their goals, financial situations and risk tolerance follow patterns well established in DC menu planning. Because those factors also influence HSA investment decisions, they can be used in HSA investment planning.

Hypothetical HSA account balance over investor lifetime

Table showing different life stages and their corresponding savings strategies. Early career: young and healthy; build assets via contributions and aggressive investments. Mid-career: dependent care costs; maintain assets via moderate contributions and aggressive investments. Late career: peak earnings; grow assets via stepped-up contributions and conservative investments. Retirement: living off savings; conserve assets via preservation- and liquidity-oriented investments.


A holistic approach to wellness

To best prepare for a healthy retirement, participants will be well served by a holistic approach to saving. That includes understanding and accessing the full range of their benefits and investment solutions. With support and guidance from plan sponsors and financial professionals, savers can learn to view HSAs as not simply a health care benefit, but a critical pillar of retirement security.

Ryan Tiernan is a senior national accounts manager with 19 years of industry experience. Prior to joining Capital Group, he founded Access Point HSA. He holds a bachelor's in biology from the University of Massachusetts at Amherst as well as the Accredited Investment Fiduciary and CIMA designations. 


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